Uruguay

Which laws, regulations and administrative rulings govern the offering and trading of securities and how are they proposed, adopted and amended?

The offering and trading of securities is governed by three sets
of regulations: the Capital Markets Act No. 18.627 of 2 December 2009, and its
Regulatory Decree No. 322/011 of 16 September 2011; the Central Bank of
Uruguay’s Charter Act No. 16.696 of 30 March 1995 (as amended by Acts No.
18.401, 18.643 and 18.670); and the Consolidated Rules for Capital Markets
passed by the Central Bank of Uruguay (CBU).

The general regulation is
contained in the Capital Markets Act and in the CBU’s Charter, which are both
formal laws passed by the Congress. Although it is the Executive Power or the
representatives at the Congress who have the formal initiative for the
enactment or amendment of these kind of regulations, the inception of the bills
can be usually found in the CBU, the stock exchanges, bank associations or the
Commission for the Promotion of Capital Markets, a public office created by the
Capital Markets Act to advise the Executive Power in the development of capital
markets in Uruguay.

The more specific aspects and requirements for the offering and
trading of securities are regulated by the CBU through the Consolidated Rules
for Capital Markets, which collect the rules approved by the CBU in its
circulars. The CBU may also approve communications, which are more specific
resolutions for all or some entities subject to the control of the CBU and
which usually contain criteria for the interpretation and compliance of the
Consolidated Rules. All the circulars and communications may be amended from
time to time by a resolution of the board of directors of the CBU or a decision
of the Superintendency of Financial Services (Superintendencia de Servicios
Financieros), the department within the CBU entrusted with the control and
regulation of the financial sector, including banks, insurance companies and
the capital market.

It is also worth mentioning
that stock exchanges have their own internal regulation and guidelines
governing the operations and agents operating within their markets, including
procedures, requirements and penalties applicable to them. These regulations
and guidelines are passed by the competent authorities of each stock exchange
and require the approval by the CBU before coming into force. There are
currently two stock exchanges in Uruguay: the Montevideo Stock Exchange (Bolsa
de Valores de Montevideo) and the Electronic Stock Exchange of Uruguay (BEVSA).

The purpose of the regulation of capital markets is to watch over transparency, competitiveness, the correct operation of the market, the mitigation of systemic risk and the protection of investors through adequate information.

The public offering of securities requires the previous registration of the issuer and the securities with the CBU. This information is open to the public. Issuers are required to present truthful, sufficient and timely information about themselves and the listed securities, and must disclose any material fact which may affect the purchase or sale of such securities. Stock exchanges and rating agencies must also comply with minimum information requirements and disclosure of material facts.

The Consolidated Rules of Capital Markets of the CBU contain several administrative and pecuniary sanctions for those who fail to comply with information requirements about material facts and for those who breach the rules of ethics and commercial loyalty or who seek to manipulate or deceit the market.

The internal rules and guidelines applied by stock exchanges seek to protect the transparency of the market, and to avoid conflict of interests and to prioritise the interest of clients over the own interest and to prevent to benefit some clients over others. According to the Capital Markets Act No. 18.627, the relationship between investors and brokers and stock exchanges is defined as consumer relations protected by the Consumers Protection Act No. 17.250 of 11 August 2000.

Which regulatory authorities oversee capital markets and what is the scope of their jurisdiction?

The Superintendency of Financial Services is the department within the CBU entrusted with the control and regulation of the capital markets. The Superintendency has jurisdiction over the public offer and trade of securities within Uruguayan territory.

How is financial fraud and price manipulation in capital markets regulated?

The regulation prohibits and sanctions the following conducts: the use of privileged information for personal benefit or the benefit of third parties; the manipulation of the market; and failure to comply with ethical and commercial loyalty standards and code of conducts applicable to the controlled entities. Stock exchanges are required to articulate a code of commercial and ethical practices – and sanctions applicable – to be followed by all brokers and other agents operating in the exchanges, with the aim of preventing the manipulation and alteration of the market.

Brokers are especially banned from participating in acts or operations which are fake or deceptive have the purpose or the effect of affecting the free price of securities in capital markets; manipulating the liquidity of a security; faking the offer or demand of securities; manipulating or artificially fixing prices, offers or demands; or obstructing the free participation of other agents. Failure to comply with these rules can entail the severest administrative sanctions by the CBU, and even civil and criminal actions against those responsible for the infringement.

According to the Capital Markets Act, the sanctions that the CBU may apply will depend on the weight of the infringement and can consist on the following: observation; fines which can be, in the case of banks, as high as 50 per cent of the basic guarantee required to banks (approximately US$6,735,500 ) and, in the case of entities that do not qualify as banks, as high as 10 per cent of the basic guarantee required to banks (approximately US$1,350,000); suspension or cancellation of the quoting of the securities, or the authorisation to make a public offer of securities, or the ability to operate in the capital market. The regulation also contains special sanctions for conducts such as manipulation of the market and failure to comply with ethical and commercial loyalty standards, which can reach US$52,000 at current rates.

The CBU may fix the amount of the fines in relation to the benefit obtained in the transgression of the rules.

In case of use of privileged information or disclosure of false information by agents operating in the capital markets, those responsible may be subject to civil and criminal actions.

Investors may seek recovery of damages by filing civil actions against the offenders and are able to resort to the remedies and injunctions available in a civil procedure. Investors may also present a claim against the offender for the violation of consumers’ rights.

In case of conflicts involving securities issued by financial trusts, the differences must necessarily be solved through arbitration. The arbitration proceeding must be regulated in the terms and conditions for the creation of the financial trust. Under Uruguayan law, in order to start arbitration the parties must grant a special arbitration agreement in addition to the arbitral clause. If one of the parties is not willing to grant the arbitration agreement, the other party can judicially force its celebration to proceed with the arbitration.

Give details of the frequency and nature of enforcement actions or private actions. Describe whistle-blower protection and incentives under the regulations.

Private civil actions based on infringements to the capital market’s regulation have not been common in Uruguay. The situation over the past ten years has been that infringements do not usually get to a state of judicial claim or remedy, but are strongly sanctioned by the CBU at an administrative level.

The regulation requires the issuers, stock exchanges, brokers, investment advisors and investment funds’ management companies to develop mechanisms and procedures that enable people to expose cases of use of privileged information or manipulation of the market. These mechanisms and procedures must ensure confidentiality and independence from the chain of command within the organisation, while providing adequate protection to the whistle-blower against any negative consequence. Besides this requirement, there are no general incentives to whistle- blowers.

What is the legal definition of a ‘security’ and which types of securities are commonly traded?

The Uruguayan Law has a broad concept of security. According to
section 13 of the Capital Markets Act, a security is any kind of good or right
incorporated in a document, including shares, debentures, futures, options,
certificates of participation and, in general, any instrument containing a
credit or investment right.

The most common securities publicly traded in the Uruguayan stock
exchanges are public bonds, private debentures and certificates of participation
issued by financial trusts. The public offer and trade of stock (equity) is
practically non-existent in Uruguay.

Only the public offer of securities is subject to the Capital Markets Act and complementary regulation. According to the Capital Markets Act, there is a public offer any time the purchase of security is offered to the public in general or to an undetermined group of potential investors. Any offer and trade of securities which is not comprised in this concept is considered a private offer. Privately offered securities are not subject to the regulation of capital markets, must be offered directly to the potential buyer and may not be publicised or quoted at a stock exchange. The issuer of private securities must inform the purchasers that the securities are not registered with the CBU.

Any public offer, negotiation and trading of securities requires the prior registration of the issuer and of the security with the Capital Markets’ Registry of the CBU. Before such registration is obtained, any kind of publicity or transaction of the securities is forbidden. In order to obtain the registration of the issuer and the securities with the CBU, the issuer must submit to the CBU the following information:

corporate information of the issuer;

terms and conditions of the issuance;

guarantees or security agreements;

risk rating; and

agreements with representative entities, payment agents, custody agents, registering entity, and any other agent participating in the issuance.

All this information must be consolidated and presented as a prospectus for the issuance.

The process for the registration of the issuer and of the securities in the CBU usually takes between three to 12 weeks. Once the registration is ready, the issuer is free to make the public offer in the authorised stock exchanges.

After the issuance is completed, the issuer must still comply with the requirements of information with the CBU, as established by the regulation, and with the stock exchanges where the securities are listed, according to the internal rules of each stock exchange.

What are the disclosure requirements for securities issuers for both public and private offerings?

Private offerings are not subject to the capital markets’
regulation and the disclosure of information is not subject to any kind of
general requirement, but will depend on what the issuer and the purchasers
agree.

In the case of public offerings, issuers must disclose any and
all information that is deemed essential about themselves and about the
securities, so that the potential investors have the necessary elements to
judge whether to proceed with the investment or not.

The misrepresentation or omission of essential information makes
the issuer liable, and may also entail the responsibility of the issuer’s
directors involved in such conduct, which is considered a breach of their duty
of loyalty. The ultimate beneficial owner and those exercising the control of
the issuer may also be subject to the same responsibility, if they were somehow
involved in the conduct.

The accounting standards used by all entities controlled by the CBU to prepare their financial reports are the International Financial Reporting Standards approved by the International Accounting Standards Board (IASB). Those rules are applicable by Decree No. 124/011, which is mandatory for financial periods beginning on or after 1 January 2012. For the remaining entities, the accounting standards to be used when preparing their financial reports are the versions of IFRS approved by the IASB as of October 2014. The latter applies to Decrees No. 291/014 and 372/015.

To the extent that the International Accounting Standards Committee’s International Financial Reporting Standards have not been fully implemented, is full convergence planned? What is the expected timetable?

The IFRS are fully applicable to financial statements filed to
the CBU. For those companies which are not subject to the control of the CBU,
there is an ongoing process to convergence between national regulations and
IFRS.

Does your jurisdiction offer policy and tax incentives to invest in the capital markets?

Uruguay offers some tax incentives to invest in capital markets:

The interests obtained from Public Bonds and the income obtained from their
transfer is exempted from Income Tax on Individuals (IRPF) and Income Tax on
Non-Residents (IRNR).

The dividends paid for the participation in the equity of public companies is
exempted from Income Tax on Individuals (IRPF) and Income Tax on Non-Residents
(IRNR).

The interests obtained from debentures or bonds which have a maturity period
over three years and which are traded in a stock exchange, are levied by Income
Tax on Individuals (IRPF) or Income Tax on Non-Residents (IRNR) at a
preferential rate of 3 per cent.

The payments obtained from certificates of participation or interests from
bonds issued by financial trust funds, which are offered and traded in a stock
exchange, are levied by Income Tax on Individuals (IRPF) and Income Tax on
Non-Residents (IRNR) at a preferential rate of 3 per cent, provided those
securities have a duration or maturity date over three years.

The sale of those certificates of participation or bonds issued by financial
trust funds is exempted from any kind of income tax.

The holders of equity in public companies do not have to compute same for the
purpose of determining the taxable amount Regarding the Wealth Tax (IPAT).

Income Tax of Non-Residents (IRNR) must be withheld by the local
entities which pay interests, dividends or royalties to non-residents which are
subject to that tax. It must be noted that Uruguay has signed treaties with
many countries to avoid double taxation and limit the withholding rates imposed
by the Uruguayan tax system.

Securities are primarily traded in the two stock exchanges
authorised by the CBU: the Montevideo Stock Exchange (Bolsa de Valores de
Montevideo) and the Electronic Stock Exchange of Uruguay (BEVSA). In the
Montevideo Stock Exchange securities are traded both physically and
electronically, while in BEVSA operation is only electronic. In both cases the
transactions may be accomplished through different methods depending on the
nature of the security (ie, currency, bonds, stock).

There is no formal OTC network developed in Uruguay,
notwithstanding private transactions over securities outside stock exchanges.

Where and how do securities clear? Can securities denominated in a foreign currency clear?

There is no formal environment for the clearing and settlement
of securities. All securities that are publicly traded must be registered and,
therefore, the issuer must designate a registering entity, which can be the
stock exchange, a financial intermediation entity (banks), brokers or even the
issuer itself. There is currently no entity that serves as a central securities
depository or clearing house. Therefore, the clearing of securities may only be
accomplished outside the stock exchange, by the parties involved. Sometimes the
CBU acts as custody of the securities for some of the operators such as banks,
insurance companies or pension funds. In those cases the settlement of
securities is done by the CBU in the accounts of those entities.

What are the distinguishing characteristics of your debt and equity capital markets?

The Uruguayan capital market is basically composed of the trading of Public Bonds in the secondary market. In 2015 these transactions represented 99 per cent of the transactions in the stock exchange, for an amount of US$7.400 million.

The rest of the operations on securities issued by the private sector consist mostly on the offer and trading of bonds issued either directly by local companies or through special purpose vehicles, the most common of which are the financial trust funds (fideicomisos financieros). From 2005 to 2015, the amount of public offers of fixed income bonds has been increasing (see chart). Although there was a decrease in the number of issuances compared to 2014, the value of those issuances was almost doubled. The great majority of securities traded are plain vanilla bonds, most of them structured through the securitisations of assets, credits or other flows of funds in financial trust funds.

Fixed income securities issued per year by private companies or SPVs.

Year

No. of issuances

Amount in US$

2004

6

36,394,941

2005

6

10,404,069

2006

6

30,800,000

2007

10

402,739,866

2008

5

43,199,369

2009

11

209,354,130

2010

12

135,115,202

2011

14

222,867,153

2012

12

282,048,736

2013

9

318,358,223

2014

20

315,146,384

2015

14

600,136,234

Source: BEVSA and BVM

Given the reduced volume of securities listed, the secondary market presents very few transactions. The unsatisfied demand of financial products and the fact that most of the investment is held by institutional investors (most of them pension funds), determine that once the securities are acquired, the investor usually keeps its position instead of seeking liquidity to turn to other – scarce – investment options.

As for the equity market, it is practically non-existent. There are currently only seven listed corporations which quote their shares in the local capital market, with virtually no transactions in the secondary market (just under US$3.4 million in 2014). Most Uruguayan companies are family owned businesses or owned by a pool of investors with a close common interest, with a financial culture of seeking financing by increasing their debt, instead of sharing the participation in the capital.

International groups operating in Uruguay usually obtain their financing for local branches from within the group, instead of participating in the local capital market.

The particular characteristics explained above place the Uruguayan market very far from other international markets, especially with regard to equity transactions.

The Electronic Stock Exchange (BEVSA) offers the opportunity to trade on forwards over currency for those authorised to operate with this kind of instruments (ie, commercial banks).

It was not until October 2014, that the CBU officially authorised Rofex Uruguay Bolsa de Valores y Futuros (UFEX) as the first futures exchange in Uruguay and to this date there is no other entity authorised for this matter.

Can you explain development of structured finance instruments in your country?

The most common structured finance instruments developed in Uruguay are the financial trust funds (fideicomisos financieros), which issue bonds or certificates of participation, with the securitisation of future credits and flows of funds. Nowadays the biggest and most usual securitisations include credits for the render of health services, credits deriving from financing to consumers, and flow of funds coming from the collection of national or municipal taxes, contributions or tariffs for the use of public services.

There law and regulation applicable to capital markets do not
contain a definition of institutional investors. However, according to the
practice admitted by the CBU, the entities included in the concept of
institutional investors are the financial intermediation entities (ie, banks),
insurance companies, investment funds’ management companies, pension funds’
management companies, and para-statal pension funds.

These entities are under the control of the CBU according to the
powers granted over the operators of the capital market and the rules contained
in the laws that regulate each of the those entities.

Can foreign broker dealers offer and sell securities in the jurisdiction? To which investors and under what circumstances?

Foreign broker dealers may offer and sell securities in Uruguay
provided they do so privately. In order to place a public offer the broker must
previously register itself and the securities with the CBU (see question 9).

What is the definition of ‘insider trading’? Outline the major developments in insider trading law giving details of any recent cases.

Although the definition or concept of insider trading is not
thoroughly regulated, it is prohibited the use of privileged information for
personal benefits or for the benefit of third parties. The failure to comply
with these rules can entail severe administrative sanctions by the CBU (in case
the offender is within the scope of entities subject to its control) and even
civil and criminal actions against those responsible for the infringement (see
question 5).

There has not been any relevant case of insider trading in
Uruguay in the recent years.

What are the roles of the authorities when a foreign issuer makes a public offering? Who has jurisdiction over the public offering?

The CBU has the same powers of control over public offerings no
matter if it is a local or a foreign issuer. As explained in question 23,
foreign issuers are subject to the same control and duty of registration
whenever their securities are publicly offered or traded. In case a foreign
issuer fails to comply with the registration and additional requirements
established by the CBU, the CBU may ban the offer of those securities and place
a penalty over the issuer.

Is there a formal understanding with other jurisdictions to share information and provide reciprocal assistance in enforcement matters? If so, which jurisdictions?

The CBU is a member of IOSCO (International Organization of
Securities Commissions) and COSRA (Council of Securities Regulators of the Americas).

As an ordinary member of IOSCO, the CBU participates in the most
important international forum for securities regulators to cooperate in the
development and oversight of regulatory standards for the protection of
investors and the market, and in the exchange of information, enforcement
against misconduct and supervision of controlled entities. IOSCO has currently
109 ordinary members from all over the world.

COSRA is international organisation created a forum for mutual
cooperation and communication to develop and foster the growth of sound
securities markets among its 31 members from the Americas and the Caribbean.
The principles of COSRA include the cooperation among the securities regulators
for effective market oversight and cross-border surveillance.

Under the Capital Markets Act, the stock exchanges and the issuers of securities which are publicly offered must comply with corporate governance rules established by the law. On February 2013, the CBU passed a more detailed regulation which modifies the Consolidated Rules for Capital Markets and develops the general guidelines contained in the Capital Markets Act. These new rules apply to issuers of publicly offered securities with a net-worth over approximately US$1,500,000 at current rates, and investment funds’ management companies.

The issuers of publicly offered securities are required to have a board of directors with a majority of independent non-executive directors and an audit committee formed by non-executive officers with financial and accounting background, as well as internal and external auditors.

Notwithstanding the general fiduciary duties required to any director of a company, the members of the board of directors of a company which publicly offers securities are subject to specific standards of loyalty which include the obligation to prioritise the interest of the company and to refrain from obtaining personal benefits from the company other than the compensation. Those standards also include the prohibition to disclose false information or hide relevant information which must be disclosed; get loans or use assets or services from the company for personal benefits or for the benefit of related parties; take advantage of a corporate opportunity; use the position of director to obtain any undue benefit for himself or for a related party; and prevent or obstruct the investigations to determine the responsibility of directors or employees of the company.

In order for a member of the board of directors to enter into a contract with the company which is within the scope of usual business, the previous approval of the board is required, together with the opinion of the audit committee. If the contract refers to an activity which is off the usual business of the company, then it requires the previous approval of a shareholders’ meeting.

The directors’ compensation needs to be approved by the shareholders’ meeting. Both the company and the directors must inform the Superintendency of Financial Services of the CBU, as well as the corresponding stock exchange, about the participation that the directors have in the stock of the company. The same obligation applies to any individual or legal entity holding who directly or indirectly holds over 10 per cent of the stock of a public company.

The board of directors must include in the Annual Report information related to the Rules of Corporate Governance applied by the company, the policies and information regarding directors’ compensation and any other relevant information which may affect the transparency of the offering of securities.

Which governing bodies must public companies adopt and what are their main functions and duties?

Public companies are required to have a board of directors, an
audit committee and an internal auditing body. According to the Consolidated
Rules for Capital Markets of the CBU, the board of directors require a majority
of independent directors who comply with minimum technical and ethical
standards, at least some of them with financial and accounting expertise.

The audit committee is dependent on the board of directors and
must be formed by a majority of non-executive members. The main duties of the
audit committee will be to control the compliance of corporate governance
rules, to suggest the appointment of members for the internal auditing body and
of the external auditor, and to work close to them in the suggestions,
observations and advice that they provide.

The internal auditing body may be formed by an individual
internal auditor or by an internal auditing commission, which are appointed by
the shareholders’ meeting. The main duties of the internal auditing body are to
control the governance of the company by the directors and the financial
statements of the company, and to render the advice and support to the
shareholders’ meeting in the cases the law requires so.

How do authorities and issuers resolve matters that are not expressly provided for in the securities laws and regulations?

Those matters are primarily solved applying the rules contained
in contractual terms and conditions of the issuance. Issuers usually resort to
arbitration as a mechanism to solve any kind of dispute. The arbitrators or any
other authority called upon to resolve a matter not expressly provided for in
the laws and regulations, should apply the contractual rules governing the issuance
and, if the matter is not regulated, then they should apply the general
principles for the construction of the rule of law, and look for a solution in
analogous laws, general principles and in the opinion of the jurisprudence and
scholars.

Which types of companies may make public offerings in your jurisdiction?

Any company is entitled to make a public offering. In practice,
companies usually use special purpose vehicles and securitise future flows of
credits or funds in order to enhance the risk rate. There are only four
corporations that publicly trade their shares.

There are two authorised stock exchanges: the Montevideo Stock Exchange (Bolsa de Valores de Montevideo) and the Electronic Stock Exchange of Uruguay (BEVSA). In 2015, the offers of securities in the primary market was of approximately US$458 million, of which 77 per cent was traded in BEVSA and 23 per cent was issued in the Montevideo Stock Exchange, while the operations in the secondary market were of approximately US$7.400 million, of which 87 per cent were made in BEVSA and 13 per cent in the Montevideo Stock Exchange. The vast majority of these operations involve fixed-income securities.

There are only seven companies which trade their shares in the Montevideo Stock Exchange, with a total amount of market capitalisation which does not exceed US$200 million.

Describe recent initiatives undertaken by the government to improve the regulation and efficiency of its capital markets and, if applicable, to incentivise or facilitate companies’ access to the capital markets.

In 2012, the Commission for the Promotion of Capital Markets started working in strategies to increase the size and volume of the Uruguayan capital market.

On February 2013, the CBU passed a more detailed regulation that modifies the Consolidated Rules for Capital Markets and develops the general guidelines contained in the Capital Markets Act, especially concerning the following aspects:

corporate governance requirements;

IPOs;

the requirements of information which must be submitted by the issuers and included in the prospectus of each offer; and

the control over representative entities of the investors and over the rating agencies.

In an effort to broaden the investment opportunities allowed for pension funds, on October 2013 Act No. 19.149 was passed by Congress, which raised the amount that pension funds can invest in securities which are traded locally, including those related in infrastructure projects, and in securities which are traded in foreign capital markets.

In 2014 the CBU established new minimum equity requirements for brokers according to the volume and characteristics of their operations, as well as their complexity and risks they involve. The CBU also created new obligations towards clients, regarding the information that needs to be provided and the requirements to be met by the contracts. The new obligations are especially relevant for brokers.

In 2015 the CBU drafted new regulation, which is still under study and will introduce some relevant changes in the regulation of capital markets. The drafts provide new elements to define public and private offerings of securities, based on the number of prospective investors and the kind of product offered, and establish new expedite procedures for both offerings. For example, for small offerings under US$1 million, a fast track course is regulated where the offering will not need to be controlled by the CBU. Another draft includes measures to accelerate the proceedings to register and list products when offered to institutional investors.

Describe the main obstacles that a company may confront in your jurisdiction when it is trying to become public. Describe any reform that you feel should be a national priority to improve capital raising by companies.

Practice shows that the most important obstacles for companies
to become public are the time it takes complete the procedure, the information
requirements for public companies, but most of all the absence of a culture of
resorting to the public offering of shares. So far, there is little space for
public companies in a market like Uruguay, where companies are usually owned by
families or a group of investors with a close common interest, which are not
used or willing to lose control over the decision-making process. If
state-owned companies which provide public services became listed companies,
that would help to develop and deepen the market.